Oil prices reached an optimistic level ($ 40 per barrel) for more than a week, making it the worst stage in the collapse of oil prices from the past.
So far, OPEC Plus’s production cuts seem to be going well, especially with the commitment of reluctant producers (such as Iraq, Kazakhstan, Azerbaijan, Nigeria, and Angola), and an increased hope for a real rebalancing of the markets.
In a report published by the American Oil Price website, the author Alex Kimani said that some oil bets believe that this stage is only the beginning, and that oil prices will reach imaginary levels. Specifically, JPMorgan highlighted its previous forecasts that oil prices would exceed $ 100 a barrel, given the large supply deficit.
In this regard, the head of the JPMorgan Oil and Gas Research Division for Europe, Middle East and Africa, Christian Malik, reiterated an earlier optimistic note, predicting that oil prices could rise to $ 190 a barrel; Due to the sharp cuts in capital expenditures by producers among other factors. In fact, global oil prices have not reached $ 100 a barrel since 2014, knowing that the price of $ 145 a barrel is the highest level recorded in two decades.
The struggle for survival
The writer mentioned that Malik has been pessimistic since 2013, but he is now optimistic about what he sees as "a very large supply and demand deficit", which could emerge in 2022, and may reach 6.8 million barrels per day by 2025 if the markets maintain Its current course.
As oil prices recently fell to their lowest levels in several years, and demand was severely affected by the Covid-19 crisis, US shale oil producers entered the stage of the struggle for survival and reduced capital expenditures for 2020 by nearly $ 85 billion; In an effort to protect balance sheets and maintain shareholder payments and liquidity.
According to the US Energy Information Administration, oil supplies will drop by more than 45 million barrels per day if the capital investment does not occur in existing or new oil fields between 2017 and 2025.
If we assume that the global demand for oil will decrease by 10 million barrels per day in the post-Covid-19 era, it will nonetheless leave a huge gap in supply and demand by about 17.5 million barrels per day, which indicates that production can be affected materially if maintained Capital spending at current levels for two or three years.
The intelligence of shale oil companies
Production may be in deficit if the levels of capital expenditures do not rise, but oil prices are not expected to exceed $ 100 a barrel, as suggested by JP Morgan and Malik.
The recent price fluctuations highlight a new era of uncertainty sweeping the global energy markets, and while global oil producers operate with inconsistent targets, the industry’s traditional recovery and recession cycle is being replaced by faster price fluctuations based on changes in production.
This is what makes price movements less severe but difficult to predict, and the constant fluctuation of the number of available crude oil barrels from smart shale oil operations is the primary driver, in addition to the long-term effects of increased fuel efficiency and an uneven global shift away from fossil fuels as per global demand, All of this news is good for clients, but it makes planning for players in the industry more difficult.
The most important question remains about the ability of US shale oil to recover from the ongoing crisis with the same flexibility that it has shown in the past?
Indeed, after the 2015-2016 oil crisis, shale oil producers managed to bypass the previous Saudi price war, by cutting costs by about 50% and attracting investors, a move that led to a staggering new growth phase, and with OPEC starting to cut production again, production jumped American shale oil is about 4 million barrels per day in about 3 and a half years.
Unfortunately, the game is completely different this time; American shale oil companies are struggling to survive, especially after they cut capital expenditures by almost 30% this year.
And capital expenditures are not yet back to the previous levels recorded before the last oil crisis, which means that it does not have much time to make any other cuts without hurting production significantly, and what makes matters worse is that this sector is already heavily indebted.
Growth at the right price
Wall Street will likely remain unchanged until competition for oil prices reaches a critical level, and Saudi Arabia and Russia will monitor shale oil conflicts in the hope of obtaining a greater market share, but this strategy is not without risk for either party, especially Riyadh.
American policymakers mostly blame Saudi Arabia - not Trump - for the recent oil meltdown. More recently, US Senators from the oil-producing states have threatened to withdraw military aid to Riyadh, and they may be stricter with the kingdom if oil prices remain low. For its part, Moscow is already subject to US energy sanctions, and lower oil prices will make Washington's restrictions more painful.
Wall Street is unlikely to be concerned with the new competition for oil prices, but it is likely to support the sector once prices start to approach $ 80 a barrel, which Riyadh needs to balance its budget.
The writer believes that the rapid rise of renewable energy sources will limit the long-term gains for the oil sector, because it will make oil uneconomical. Last year, the "BNP Paribas" group told CNBC that oil prices should remain in the range of $ 10-20 dollars a barrel in order to maintain their competitiveness in the pivotal transportation sector.